The Market’s On Fire

August presented us with another defining month for the mortgage industry. Reviewing the month’s previous stats, July proved to be on fire. Sales were up across the country, drastically in the major centres: Vancouver and Toronto were up 40% and 16% year over year respectively. Calgary was a leader in year over year price increase growth and once again broke new records for the luxury home sales with 70 homes sold in the Million+ bracket. Calgary’s momentum has not slowed; the first 19 days of August already surpassed the previous August record of 38 sales, set in 2007.

The heated market is not just affecting the homeowners looking to buy and sell, but rentals are also in high demand. Calgary has the lowest vacancy rates in the country hovering at 1% and Toronto’s high demand has edged rent prices up 4.1% in the second quarter alone.

With the pulse back in the market, there has been yet another government interjection to hold the reins. This time, the mortgage restrictions are targeting the lenders through the control of mortgage insurance lending via Canada Mortgage and Housing Corporation (CMHC).

Earlier this year, CMHC announced an 85 Billion dollar securities cap for 2013, up from 76 Billion the year previous. With just over half of the year complete, 66 Billion has already been allotted, which has lead to a ‘new’ 350 Million monthly securities limit for the Credit Unions, Banks and other mortgage lenders.

Under the Housing Act Mortgage-Backed Securities (NHA MBS) program, banks are able to securitize large portions of their mortgages, enabling them to lend more funds to new homebuyers at lower prices.

This new limitation will now force banks and other lenders to consider other alternatives for managing the risk of mortgage defaults. Instead of being able to pass that risk to the government and taxpayers through CMHC, they will have to look to other private mortgage insurance providers or potentially decide not to take on specific mortgages.

The threat to homebuyers: there may be fewer lenders willing to take your mortgage risk, making it harder to get mortgage approval or obtain best market rates.

It’s estimated that 70% of Canadians are homeowners, and with that, the Bank of Canada is not shy in listing the possibility of a sharp housing fall as the No. 1 domestic risk to the economy. The government is very cautious and acting as overprotective parents over the housing market. Understandably so, with the outcome of 2008, however, there are many organic industry shifts that are naturally encouraging a slow down and balance to the market, including a decrease in land purchases from developers and the selloff in the bond market which has put an upward pressure on mortgage rates. Best 5-year rate is now around 3.69%.

More highlights from August’s headlines:

OVERALL

  • “The share of total employment now working in manufacturing has dropped to an all-time low below 10 per cent since the start of the year (now just 9.7 per cent),” BMO economist Douglas Porter noted recently. “That’s down from more than 15 per cent at the start of last decade and barely half the level in the 1970s.” Meanwhile, construction jobs have never been more plentiful. They now account for 7.6 per cent of all jobs in Canada — the highest proportion in records going back to the 1970s, and well above the long-term average of around five per cent.
  • CMHC – 17,993 actual starts in July which, extrapolated over 12 months, gives a seasonally adjusted annual rate of 192,853 starts. That was slightly down from June’s adjusted annual rate of 193,797 starts. The agency says the annual rate of urban starts decreased by 2.1% in July to 173,042 units, as both single and multiple urban starts declined.
  • Canadian home ownership levels are not tracked as closely as they are in the United States but it is believed we are now close to having 70% of households in an ownership position — an all-time high. We were at 68.4% based on the 2006 census and the percentage is expected to climb the next time data is released.
  • RealNet Canada Inc. said residential land investment in Toronto fell 51% in the first six months of the year compared to the same period in 2012. Sales in Greater Vancouver fell 30% and Calgary 52% for the same period.
  • Commercial real estate research firm RealNet recorded $329 million worth of commercial land sales in Metro Vancouver over the first four months of 2013, which was down 30 per cent from the $472 million made by developers over the same period of 2012, which was a high point for the region.
  • Richard Vilner, research manager in RealNet’s Greater Toronto office added that $329 million was still above Metro Vancouver’s 10-year average for sales of land to developers — the only city among the three it was comparing in its report (Calgary and Toronto were the others) where that was the case.
  • The deputy chief economist of CIBC World Markets, Benjamin Tal, said builders curtailing their land purchases shows the market is responding on its own to correct housing imbalances.
  • “The combination of steps the government has taken in the last year, coupled with the beginnings of a selloff in the bond market will put a bit of upward pressure on mortgage rates,” said CIBC chief economist Avery Shenfeld.
  • Bank of Canada lists the possibility of a sharp housing fall as the No. 1 domestic risk to the economy.
  • Canada Mortgage and Housing Corp. has notified mortgage lenders, including banks and credit unions, it will restrict each of them to a maximum of $350 million of new guarantees in August under its National Housing Act Mortgage-Backed Securities program. For lenders who package their mortgage loans and sell them as securities to investors, the CMHC program takes out the risk by guaranteeing payments on the investments, and allows the lenders to use the proceeds as capital for new loans and offer them more cheaply. The federal Crown corporation has given authority to guarantee up to $85 billion under the program, but by the end of July, $66 billion had been committed.
  • “We are starting to see the impact of the changes wearing off. Prices in most markets are now rising faster than income,” Petramala, Economist at TD Bank said. “So it makes sense the federal government, CMHC, may want to limit some of the risk-taking in the housing market.”
  • Canadian home prices rose in July from June to an all-time high, but the modest monthly gain suggests the robust housing market may be cooling again, according to data from the Teranet-National Bank Composite House Price Index
  • The Teranet data showed prices rose in July from June in nine of the 11 metropolitan market surveyed, led by a 2.6% rise in Victoria, a 1.8% rise in Hamilton, a 1.3% gain in Toronto and a 0.8% rise in Edmonton. Prices were up 0.5% in Calgary, 0.3% in Ottawa, Quebec City and Vancouver, and flat in Montreal.
Prices dropped in the month by 0.4% in Winnipeg and 0.6% in Halifax.
  • The Canadian Real Estate Association’s report on activity for July showed resales edging up 0.2% from June on a seasonally adjusted basis and up 9.4% from July 2012, when tighter rules put the brakes on lenders and buyers.
  • The national average home price was $382,373, 8.4% higher than a year ago, although Gregory Klump, the real estate association’s chief economist, said that was mostly because sales were concentrated in expensive major markets. Excluding sales in Toronto and Vancouver, the national average price would have gone up only half as much and sales volume would have been down from June, the CREA report notes.
  • Canada’s dollar depreciated by 1.4% against the U.S. dollar in June following a May decline of 3%. Investors and economists attributed the bond sale to concerns that interest rates will rise as the U.S. Federal Reserve scales back its bond purchases and signs of faster growth in the U.S. and Europe.
  • Royal Bank is increasing the rates by 20 basis points, with its fixed five-year closed mortgage rising to 5.34% and its five-year special rate to 3.89% – came a day after the Bank of Montreal raised some of its mortgage rates.
  • In the USA – The latest homeownership rate, set to be released today by the Census Bureau, will hit bottom at about 64% in the next year as families leave the foreclosure pipeline and enter rental homes, according to a May analysis by London-based Capital Economics Inc. It’s currently the lowest in almost 18 years after averaging 64% for 30 years through 1995.
  • In the USA – The rate is now 4.58%, up from 4.4% the prior week. That is the highest level for the 30-year in more than two years, since it hit 4.6% on July 7, 2011, according to Freddie Mac spokesman Chad Wandler.

PREDICTIONS

  • TREB now see prices rising during the rest of 2013 and into 2104.
  • “Months of inventory for low-rise homes remains near record lows, suggesting that sellers’ market conditions will remain in place in the second half of 2013. An increase in listings in 2014 would lead to more balanced market conditions and a slower pace of price growth next year, albeit still above the rate of inflation,” said Jason Mercer, senior manager of market analysis.
  • The projection calls for the economy to advance by 1.5 per cent, followed by an even softer 1.0 per cent in 2014, as the country’s over-built housing market moves from soft to crash landing. That would likely put Canada behind the U.S., Japan and possibly Germany — among the G7 countries — in terms of growth in at least one of the years.
  • Capital Economics analyst David Madani, says, given the under-performance, he expects the Bank of Canada will keep interest rates at current super-low levels until late 2015.
  • While the central bank sees growth accelerating in the July-September period this year and continuing into the next two years, Capital Economics predicts the opposite scenario, with the second half of this year squeezing out a mere one-per-cent growth rate. The slow pace extends to 2014, then picks up to two per cent in 2015.
  • Madani anticipates the unemployment rate to rise from an average 7.3 per cent this year to 8.0 per cent in 2014. The jobless rate will stabilize somewhat at 7.8 per cent in 2015.
  • Poloz said, private sector demand in the U.S. had turned bullish, which should boost demand for Canadian exports of lumber, and machinery and equipment.
  • TD economist Diana Petramala, who specializes in the housing market, estimated rates could rise from 20 to 65 basis points, the equivalent of 0.2 to 0.65 of a percentage point. She noted that historically, this is a minor increase. “Affordability will still remain in the housing market,” she said.
  • Mazen Issa, Canada Macro Strategist at TD Securities, said the recent rise in mortgage rates will reduce affordability, limiting sales and slowing the rate of price rises over the rest of 2013 and into 2014.
  • On one side of the divide you’ve got the real estate community with people like Phil Soper, chief executive of Royal LePage Real Estate Services, saying improved results for sales and prices in July are not all that dramatic by historical standards. Their opponents are the housing naysayers like David Madani of Capital Economics who has been calling for a housing pullback since February 2011 and portrays the recent bump in sales as a last gasp before the market cools for the rest of 2013.
  • Nationally, the CMHC’s point forecast is for MLS sales across Canada to decline from 453,372 in 2012 to 448,900 this year and then rise to 467,600 in 2014. The national average sale price is expected to see year-over-year growth of 2.7 per cent this year to $374,800 followed by an increase of 2.1 per cent in 2014 to $382,800.
  • According to Benjamin Tal, deputy chief economist at CIBC world markets, the increases are a sign of things to come. “Interest rates are rising for a reason,” he said, attributing the changes to an increasingly healthy U.S. economy, which analysts believe will benefit Canada as well.
  • A report, funded by Genworth Canada, the largest private provider of mortgage default insurance in the country, says the sector will avoid a major downturn because of population growth and employment gains which will drive demand and soak up supply.
  • Conference Board of Canada doesn’t see prices for condos coming down in any of the eight markets it surveyed. “We don’t think a country wide crash is likely,” it said in its report. Employment will rise moderately while interest rates will inch up slowly, mitigating any disaster.

By market:

    • Montréal’s economic growth will remain steady and its aging population will support sales, which will only grow by 1.4% from 2015 to 2017.
    • Ottawa will feel the effects of government spending cuts. Unit sales will still increase by 2.5% from 2015 to 2017
    • Toronto’s inventory will continue to build up, but population growth is expected to bring builders and buyers back to the market by 2015
    • Calgary new condo construction will be hurt by third-quarter flood. It will have the highest growth in starts in resales in 2014. Price growth will be in the 2% to 3.5% range over the next few years.
    • Vancouver will stay the most expensive housing market in the country, and make condos an affordable option. It is expected to be a buyer’s market in 2013.

“Over-all, the days of very cheap mortgages are going to be replaced by cheap mortgages.” Avery Shenfeld,  CIBC chief economist

VANCOUVER

  • In the Vancouver market, the local real estate board said July sales came in 40.4% ahead of a year ago and were 0.1% above the 10-year average.
  • REBGV says its price index for Greater Vancouver is off 2.3% from a year ago but flat from a month ago.
  • The index for single family detached homes is up 11.2% over half a decade while apartments have experienced only a 0.2% gain.
  • For the Real Estate Board of Greater Vancouver, July was the hottest month of the year so far, and the busiest July since 2009, the board says.
  • Sales cleared through the Multiple Listing Service reached 2,946 in July, the board reports. That’s a 40.4 per cent increase compared to the 2,098 sales recorded in July 2012, and an 11.5 per cent increase compared to the 2,642 sales in June 2013.
  • The boost in sales, however, doesn’t appear to have put much pressure on pricing.
  • In Metro Vancouver, the benchmark price for all homes in the board’s region was $601,900 in July, which is still 2.3 per cent below the benchmark price of this time last year, but an increase of 2.3 per cent over the last six months.
  • The average Multiple Listing Service selling price for a single-family home in Greater Vancouver has skyrocketed in the past 30 years – from $130,000 in 1983 to $1.1 million last month.
  • Home sales in B.C. soared last month, the highest number for the month of July in eight years, according to the British Columbia Real Estate Association. a total of 7,650 residential sales were recorded on the Multiple Listing Service, up 18 per cent from July of 2012. The average MLS price in the province was $534,360, up 12.5 per cent from July 2012.
  • According to a report released earlier this month from the Real Estate Board of Greater Vancouver, July was the hottest month this year for home sales in Vancouver. Sales in the region on the MLS reached 2,946 in July, up 11.5 per cent from the month previous, and up 40.4 per cent from July 2012. In Metro Vancouver, the benchmark price for all homes in the board’s region was $601,900 in July.
  • The Real Estate Board of Greater Vancouver says single family detached home prices are up 16.8% over the last five years while apartment prices have risen just 0.2% during the same period.

TORONTO

  • The Toronto Real Estate Board said there were 8,544 sales in July 2013, up 16% from a year earlier and the best July since 2009 and third best on record. The board says new listings are rising, but at a slower rate than sales.
  • “Despite recent increases in average borrowing costs, home buyers are still finding affordable home ownership options in the greater Toronto area,” said Diane Usher, president of TREB, in a release. “We are a year removed from the onset of stricter mortgage lending guidelines and many households who put their decision to purchase a home on hold have reactivated their search. An increasing number of these households are getting deals done.”
  • TREB said the tight market conditions helped push the overall average price in the GTA to $513,246, an 8% increase from a year ago.
  • “The low-rise market segment continued to be the driver of overall price growth,” said TREB, noting condominium prices are still rising ahead of inflation. The average condo price rose 3.4% from a year ago.
  • Toronto condo research firm Urbanation Inc. released statistics, which shows the market pulling back sharply. The 3,903 number of new condominiums sold in the second quarter, 3,903, was below levels a year earlier. Developers have responded by opening 1,000 less condominiums than in a typical second quarter, the firm said.
  • Mr. Vilner, research manager with GTA Commercial Real Estate at RealNet, says only a fraction of land purchased in the last couple of years is now having condos built on it. “There’s still a ton more to come. Builders are slowing down their new developments because of the slowdown in sales,” he says. Another issue is the cost of land has risen steadily. In the GTA, low density land and detached new home products saw a 79% increase in price per acre since 2005. However, low density land values fell 16% over the first six months of this year.
  • “It’s a complete inverse out there. A decade ago you had three low-rise choices for one high-rise, now you’ve got three high-rise choices for one low-rise,” says Mr. Carras. High-rise sales are already falling. July sales were 34% below their 10-year average. Yet as of July 31 there are 256 high-rise developments in the GTA with 66,126 units. By the end of 2013, the market will add 17,000 condos.
  • New home sales across the GTA hit their lowest level in 10 years in July, yet prices continue to shatter previous records, averaging a new high of $645,854, according to statistics released by the Building Industry and Land Development Association. Just 783 lowrise homes were sold across the GTA in July, 45 per cent below 10-year averages, according to statistics compiled for BILD by RealNet Canada Inc., which has warned repeatedly that affordability is becoming a major deterrent in the single-family home market.
  • Rental demand remains unrelenting across the GTA, and especially in the downtown core, with a record 5,315 condo apartments listed for rent via the MLS system in the second quarter of this year, up 20 per cent from the same time last year, according to research firm Urbanation. Even that surge of listings couldn’t keep up with demand — much of it from young professionals — and rents climbed 4.1 per cent during the same period to a record $2.35 per square foot.
  • But even the rental market could soon be under pressure. While condo rentals spiked 20 per cent, the number of rental condos coming online grew 22 per cent, suggesting that supply is still larger than demand.
  • The Globe and Mail reported that a developer “who declined to be named” estimates the actual prices of condos have fallen by about 15 per cent. With the number of condo sales falling, developers have turned to giving buyers discounts in the form of free furniture or reductions on condo fees, among other things. Thus the official sales prices remain steady, while actual prices come down.

CALGARY

  • Ann-Marie Lurie, chief economist for the Calgary Real Estate Board, said there is no good way to measure the effect of flooding on real estate sales. Still, Lurie said most of the increased sales volume likely had little to do with the flood at all, and more to do with market conditions. Notably, the strongest growth occurred in the condo market, which saw a 26 per cent increase in overall sales over the previous year. For single family homes, the increase was 14 per cent.
  • Tight market conditions remain for both single family and condominiums. Year-over-year new listings increased in July to 1,958 units, but overall active listings declined to 2,917 units, nearly 20 per cent lower than the already declining levels recorded in 2012.
  • Calgary’s luxury real estate market posted record sales in July, when 70 homes exchanged hands for $1 million or more.
  • In the first seven months of the year, realtors sold 470 homes worth $1 million or more, compared to 344 purchased during the same period last year, the real estate board said.
  • Calgary’s vacancy rate hovers at about one per cent and is the lowest in the country, according to Canada Mortgage and Housing Corp.
  • Calgary led the country in July with the best year-over-year price growth in the resale housing market.
  • CREA stats indicated Calgary MLS sales in July of 2,976 were up 18.9 per cent from last year while the average sale price jumped by 7.0 per cent to $438,192.
  • In Alberta, transactions increased by 17.8 per cent to 6,853 units while the average price was up by 4.3 per cent to $379,696.
  • Calgary prices rose by 5.9 per cent from July 2012. Only Hamilton had a bigger increase at 6.7 per cent.
  • According to Mike Fotiou, associate broker for First Place Realty in Calgary, luxury home sales in the city have already broke the August record previously set in 2007. And a third of the month still remains. Between August 1-19, Fotiou says a total of 42 homes sold for $1 million or more on the MLS market. In August 2007, there were 38 sales in that price range.

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